Banks to move on environmental bonds

Some of the biggest banks in Australia are considering developing environmental impact bonds as a way to restructure existing renewable energy plants, according to the Responsible Investment Association of Australia (RIAA) chief executive, Simon O'Connor.

Environmental impact bonds have been issued by the World Bank and International Monetary Fund as climate bonds. However, the launch of two new social benefit bonds by the NSW Government has paved the way for further types of social impact investing in Australia, according to O'Connor.

He said RIAA has formed a working group to debate the optimal model for super fund investment into social benefit bonds.

"There are some pretty major barriers to institutions getting involved in the current offerings," he said.

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"It generally comes down to scale — many are too small but there's a lot of interest in them."

The UnitingCare Burnside Newpin social benefit bond, the first in Australia, experienced such a level of interest that investments were closed early. NGS Super was one investor and committed $500,000 to the initiative.

Despite a significant level of interest, many institutions would likely gauge the performance of social benefit bonds before they invested, according to O'Connor.

"It has the potential to be a really strong part of the asset allocation of institutional investors in Australia going forward, but the problems come through scale and come through measurability of social metrics, so I think a lot of people are going to sit on their hands and wait and see how they perform," he said.

Although social benefit bonds had been structured from a semi-philanthropic viewpoint, institutions would need to see the financial benefit to be convinced.

"When we start framing them as having really strong financial underpinnings, that's when the institutions will start to get really interested here," he said.

Commonwealth Bank and Westpac Institutional Bank have also teamed up to launch a social benefit bond linked to The Benevolent Society to fund the establishment of the Family Preservation Centre.

Global head of debt markets at Commonwealth Bank, Simon Ling, said social benefit bonds could potentially fill significant funding gaps where government spending and philanthropic donations were not sufficient to have a substantial impact.

The potential for social impact bonds is vast. Ecotrust Australia, before announcing it would wind down operations, were in talks of developing an Indigenous Impact Bond.